France Unveils More Budget Cuts to Reduce Deficit

France unveils more budget cuts and tax hikes to wipe out deficit by 2016. Photo: REUTERS

France, the second largest economy in the Eurozone, has proposed an austerity – featuring budget cuts and tax increases – that Prime Minister François Fillon hopes will cut the country’s public deficit by 2016 and preserve the nation’s AAA credit rating.

President Nicolas Sarkozy reportedly met with his top ministers to forge the new measures over the weekend.

Sarkozy wants to slash the country’s public deficit to 4.5 percent of GDP next year from 5.7 percent this year.

Specifically, the government proposes to hike the Value Added Tax (VAT) on most goods and services to 7.0 percent from 5.5 percent (excluding essential items like food); to temporarily raise the corporate tax on companies with annual turnover of more than 250 million euros ($344 million) by 5.0 percent

In addition, the plan to boost the retirement age from 60 to 62 would commence in 2017, rather than in 2018,

The French government expects these proposals to generate budget additional budget savings of 7 billion euros ($9.6 billion) in 2012 and 11.6 billion euros ($15.9 billion) in 2013.

These measures come on top of other proposals unveiled in August which called for higher taxes on the wealthy and the closure of various tax loopholes – these steps are expected to generated savings of 12 billion euros over the next two years.

The time has come to adjust France's efforts. With the president, we have only one goal: to protect the French people from the serious difficulties that many European countries are now facing, Fillon said at a press conference on Monday.

I believe that our citizens are now aware of the risks to our livelihoods and futures caused by deficits and debt. Bankruptcy is no longer an abstract term. Our financial, economic and social sovereignty require prolonged collective efforts and even some sacrifices. To reach zero deficit by 2016, which is our objective, we must save a little more than 100 billion euros.”

Fillon added: It is unthinkable to do this exclusively by raising taxes, as the opposition suggests. This would lead to the tripling of income taxes and the doubling of [the value-added tax] VAT.

However, even with these budget cuts, it will be difficult for France will significantly cut the deficit, while economic growth remains so tepid. The government downgraded its GDP growth forecast to 1.0 for both this year and next.

Marc Touati, chief economist at French brokerage Assya, told BBC: What is somewhat disappointing about this is that we are forgetting the main thing, which is that today we have no growth. We are on the brink of a recession, we are not even sure to reach 1 percent growth next year.

Clearly, France wants to avoid the embarrassment of having other countries dictate its policies with regard to its budget.

Our country must not be condemned to have its policies one day imposed by others. I want to tell the French people that the budgetary and fiscal efforts that we undertake today are a choice we make for the country and for generations to come, Fillon said.

Rumors have swirled that credit agencies would downgrade France’s coveted AAA debt rating. Last month, Moody’s warned that it might tack on a “negative outlook” on the country’s Aaa credit rating due to its weakening financial strength.

Sarkozy, who is also facing an uphill battle in next year’s elections, is likely seeking to upgrade his credentials as a financially prudent leader.

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